Remarks of Tony Tyler at the China Civil Aviation Development Forum in Beijing

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Thank you for the kind opportunity to address you this morning. And it is indeed a great pleasure to be in China—a country that clearly places an enormous importance on the development of civil aviation.

Aviation provides the connectivity that has made our planet a global community. It supports nearly 57 million jobs and $2.2 trillion in economic activity globally. The benefits of connectivity go well beyond that. The Chinese Minister of Commerce recently announced the intention to raise China’s share of world trade from 10.4% to 15%. Aviation will play a key role in achieving that.

Chinese aviation exists within a global industry. And it is a tough business to be in. Between 2001 and 2011, the world’s airlines took in over $5.5 trillion in revenues. But the net result was a loss of $26 billion.

The good news is that we are expecting airlines to turn a global profit this year—which will be the third year in a row. The best year was 2010 when airlines made about $16 billion. That was halved in 2011 to about $8 billion. And our current forecast for 2012 is for that to fall to $3 billion.

While profits counted in the billions of dollars sound impressive, we must remember that these are aggregate for the entire industry. So, if we make a $3 billion profit this year on expected revenues of $633 billion, the net result is a 0.5% margin. Some airlines are doing better than others. But at the industry level we can say that this is a business characterized by razor thin profits that do not cover even its cost of capital.

We can also say that the general trend over the last three years has been for a weakening of already weak profitability. The industry’s fortunes parallel global economic trends. The recovery from the global financial crisis made 2010 a banner year. But it has been a largely jobless recovery. The economic uncertainty over the continuing saga of the European debt crisis and the slowing of Chinese exports continue to knock business confidence.

Nonetheless, passenger demand is strong. We have seen global volume growth consistent with the historical trend of 6% for the last three years. Capacity managed consistently to meet that demand has helped to recover the 14% yield decline that we saw in the disastrous year of 2009.

The unpredictable, volatile and rising price of oil is the main factor currently impacting airline profits. Oil has now been over $100/barrel for over 14 months. And, with respect to fuel prices, we are in a completely different world than a decade ago. In 2002, fuel represented an average of 13% of the industry’s cost structure. This year we anticipate that it will be 34%.

With limited hedging capabilities, China’s carriers are amongst those being hit by the rise in the fuel price. For 2011, we saw Chinese carrier revenues rise by about 18% to CNY 360 billion while profits fell by nearly 14% to about CNY 28 billion—largely because of fuel prices

Even so, that was a healthy profit. It translates to just over $4 billion. And that is equal to half of the entire global aviation industry’s profit last year. Congratulations to the strong team effort and partnerships which are contributing to this impressive story.

China is a huge market today. Looking at the Mainland of China alone, it was the second largest domestic market in the world. And it ranks seventh in the world for international travel and fourth for international cargo.

And the Chinese market is growing even more important. Of the 877 million additional people who are expected to travel in 2015 compared to 2010, over 212 million will be on journeys within or connected to China. So nearly a quarter of the growth in the global aviation industry is expected to be associated with China.

Realizing that potential will be hard work. But I must say that China has done a great job of setting many of the parameters to ensure success—from airport construction to improvements in air traffic management. China led the global drive to achieve 100% e-ticketing. And a partnership between Air China and Beijing Capital Airport put China among the first countries in the world to implement all six IATA Fast Travel projects in a single airport.

All of these are examples of advances in air transport that will help enable China to achieve the goal of 15% of world trade. That’s great. But there is also a lot more that can and must be done. The demand for connectivity will grow in tandem with the demand for trade.

There are two core concepts that should guide further developments: sufficient capacity and global standards.

Capacity

China has done a fantastic job of building airports. The new terminal in Beijing is among the most impressive in the world. And it is impressive that the authorities are already looking to ensure that growth can be accommodated when it reaches its design capacity of 80 million passengers.

The best solution would be expansion on the same geographic site. Consolidating traffic in one airport creates the most options for connectivity and keeps costs low. But if it is decided that a second location is necessary, then we will need a transparent and clear system for allocating operations between the two airports. This should be decided upon in consultation with the airlines.

And we should be mindful that there are many examples of lost opportunity when international and domestic traffic are artificially separated. Montreal and Tokyo come to mind. Montreal’s hub is growing faster now that the traffic has been combined at Pierre Elliot Trudeau International Airport—the old Dorval. And Tokyo’s Haneda Airport is now open to international traffic, creating new connectivity options between secondary Japanese cities and international destinations.

What happens on the ground must be matched with improvements in airspace capacity. IATA has worked very successfully with China to open new entry points to Chinese airspace and create more flexibility in cooperation with the military. This has been particularly useful in the golden triangle of Beijing, Shanghai and Guangzhou.

However, the challenge is growing day by day as demand increases. We have seen the frustrations of passengers with flight delays—some quite dramatic. The more flexibility we have in how we use and share airspace with the military, the better we will be able to manage growth and meet passenger demand at the times that they need to travel. That flexibility will also include the sharing of routes between domestic and international traffic—particularly important as their peak usage times are different.

These solutions will require the continued cooperation of IATA, the airlines, the Civil Aviation Administration of China (CAAC), the Air Traffic Management Bureau and the military.

Global Standards

These solutions also point to the second core concept—global standards. They are at the heart of aviation. They enable airlines to connect our planet safely and efficiently.

China has embraced global standards on safety. The IATA Operational Safety Audit (IOSA) is a good example. Thirteen mainland Chinese carriers are on the IOSA registry. China had no hull losses with Western-built jet aircraft in 2011 and none so far this year. And the safety performance of IOSA-registered airlines globally is 52% better than non-IOSA carriers.

China is upholding global standards in its very strong—and I would say correct—stand against the EU Emissions Trading Scheme (ETS).

The aviation community is taking a global and responsible approach to managing its emissions.

It has made a commitment to improve fuel efficiency by 1.5% annually to 2020, to cap net emissions from 2020 and to cut net emissions in half by 2050 compared to 2005. The industry is united behind these targets and looking for global solutions to help achieve them.

China is playing an important role in achieving these targets. Through the work of Petro-China and Air China, it is among the leaders in the development of biofuels, which will be an important component of our success.

China is also the front line of state opposition to Europe’s misguided plans to include international aviation in the ETS. The regional approach will distort markets. We believe that the EU’s unilateral action is in contravention of the Chicago Convention—the ultimate global standard for aviation. And I fully understand why China views this as an attack on its sovereignty.

Of course, nobody wants a trade war. We continue to urge a solution through the International Civil Aviation Organization (ICAO) process. I have been very clear in my communication with the Europeans that it’s not a viable bargaining position for the Directorate General for Climate Action to keep relentlessly saying that Europe has no option but to implement without compromise. We all want a solution that is global. ICAO is working on four options. Europe must be a sincere participant in those negotiations.

Along with applauding China’s firm upholding of global standards on safety and with respect to the EU ETS, I must encourage some change in the way that China deals with infrastructure charges.

As I mentioned, IATA is working very closely with the authorities here to strengthen efficiency and ensure cost-efficient investments that facilitate successful growth. We are also engaging with the CAAC in a dialogue on charges.

Our goal is to arrive at a charges structure that is competitive and in line with global best practices and ICAO standards. Today, China’s air navigation service charges are among the highest in the world. The price of fuel is also among the highest–it is estimated that airlines pay a premium of over $400 million annually to refuel at Chinese airports.

Bringing those prices in line with global levels will benefit Chinese carriers more than any others and will thereby help to make them more competitive. So there is scope to improve cost competitiveness. And we need to eliminate the differential in charges between Chinese and foreign carriers that is unacceptable under ICAO policies. This move will also help Chinese carriers improve their competitiveness by forcing them to compete on a more level playing field.

Conclusion

I am confident about China’s aviation future. There is tremendous growth potential and an industry working with government to achieve it. In a volatile operating environment—such as exists today with high and fluctuating oil prices and the evolving European debt crisis—we must have flexibility to achieve that potential. The successful strategies of yesterday may not fit the challenges of tomorrow.

IATA is committed to China. Beijing is our largest regional office. And in a few weeks’ time we will invite the aviation world to Beijing for our Annual General Meeting. And working closely alongside the Chinese industry and the Chinese government I see IATA’s relationship with China as a partnership—navigating through the challenges and building the future.